Rental Income from Two Houses: Tax Implications and ITR Filing

Dreaming of Multiple Homes? Don't Forget the Tax Man! Rental Income, Loans & ITR Filing for AY 2025-26 Owning one house is a signifi...

Dreaming of Multiple Homes? Don't Forget the Tax Man! Rental Income, Loans & ITR Filing for AY 2025-26

Owning one house is a significant achievement. Owning two or more? That often signals financial success and smart investment. But with multiple properties comes a distinct set of tax rules that you absolutely must understand to avoid notices, penalties, or missing out on crucial benefits.

The landscape of house property taxation, especially concerning home loan interest deductions and the choice between the Old and New Tax Regimes, can be a bit tricky. For Assessment Year (AY) 2025-26 (covering income from Financial Year 2024-25), there are some important considerations, particularly with the continued prominence of the New Tax Regime.

Are you earning rental income from a second house, or perhaps you have a home loan on a self-occupied property? If so, you're in the right place! Read on to navigate the complexities of taxing your house property income and claiming eligible deductions, especially under the New Tax Regime, for your ITR filing.

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1. Classifying Your House Properties for Tax Purposes

The Income Tax Act classifies your residential properties primarily into three categories for tax calculation:

• Self-Occupied Property (SOP): This is a property that you, the owner, use for your own residential purposes throughout the financial year. Up until AY 2024-25, only one property could be declared as SOP, or two properties if specific conditions were met (e.g., you live in another city for work and don't own a house there).

• Crucial Update for AY 2025-26 (FY 2024-25 income): As per the proposals made in Budget 2025, a taxpayer can now declare any two residential properties as self-occupied properties (SOPs) without any conditions. This is a significant simplification! If you own three or more properties, you can choose any two to be SOPs, and the remaining properties will fall into the next category.

• The Annual Value (AV) of an SOP is considered Nil. This means no notional income is taxed from a self-occupied property.

• Let-Out Property (LOP): This is a property that is actually rented out, either for the full or a part of the financial year. The actual rent received is considered for taxation.

• Deemed Let-Out Property (DLOP): This applies if you own more than two residential properties. You can choose any two as SOPs. Any additional residential property you own (third, fourth, etc.), which is not actually let out, will be treated as a Deemed Let-Out Property. Even if it's lying vacant, a "notional rent" (what it could have earned if rented out) is calculated and taxed as if it were rental income.

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2. Calculating Income from "House Property"

Whether your property is let-out or deemed let-out, the income is calculated under the head "Income from House Property." Here's the general formula:

Gross Annual Value (GAV)

• For Let-Out Property: This is the higher of:

• Actual rent received or receivable.

• Fair Market Value (FMV) (what a similar property would fetch as rent).

• Municipal Value (value determined by local authorities).

• Standard Rent (if the property is covered under the Rent Control Act).

• For Deemed Let-Out Property: This is the notional rent the property would fetch in the open market (typically, the higher of FMV or Municipal Value).

Less: Municipal Taxes Paid

• Only taxes actually paid by the owner during the financial year are deductible from GAV.

= Net Annual Value (NAV)

Less: Standard Deduction u/s 24(a)

• A flat 30% of the NAV is allowed as a standard deduction. This is a lump sum deduction for repairs and maintenance, irrespective of your actual expenses. This deduction is available for both LOPs and DLOPs, but not for SOPs (since their NAV is Nil).

Less: Interest on Borrowed Capital (Home Loan) u/s 24(b)

• This is where things get interesting, especially with the New Tax Regime.

= Taxable Income / (Loss) from House Property

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3. Home Loan Interest Deduction: Old vs. New Tax Regime

This is a critical point that dictates your tax strategy, especially if you have home loans.

Old Tax Regime (With Deductions & Exemptions)

If you opt for the Old Tax Regime, you can claim significant deductions:

• Self-Occupied Property (SOP):

• Interest paid on a home loan for acquisition or construction of an SOP is deductible up to ₹2,00,000 per financial year.

• If the loan was taken for repair, renewal, or reconstruction, the limit is ₹30,000.

• If you have two SOPs (as allowed from AY 2025-26), the combined interest deduction limit for both properties remains ₹2,00,000 per year. You cannot claim ₹2 lakh for each.

• Let-Out Property (LOP) / Deemed Let-Out Property (DLOP):

• The entire interest paid on the home loan for an LOP or DLOP is fully deductible, without any upper limit. This is a huge advantage for landlords.

• However, any loss from house property (due to high interest or municipal taxes exceeding rental income) can be set off against other income heads (like salary, business income) only up to ₹2,00,000 per year. Any remaining loss can be carried forward for up to 8 subsequent assessment years.

New Tax Regime (Simplified, No Deductions)

The New Tax Regime (Section 115BAC) offers lower tax slabs but comes with a catch: most common deductions and exemptions are not allowed.

• Self-Occupied Property (SOP):

• No deduction for interest paid on a home loan under Section 24(b). This means the ₹2 lakh benefit is not available if you choose the New Tax Regime.

• Let-Out Property (LOP) / Deemed Let-Out Property (DLOP):

• You can still claim the full interest paid on a home loan for LOP/DLOPs without any upper limit. This deduction reduces your "Income from House Property."

• However, a major limitation in the New Tax Regime: Any loss from house property (due to high interest or municipal taxes) cannot be set off against any other income head (like salary). It can only be carried forward to set off against future income from "House Property" itself. This significantly reduces the immediate benefit of high interest deductions.

• The 30% standard deduction on NAV for LOPs/DLOPs is still available under the New Tax Regime.

Summary of Home Loan Interest Deduction:

Feature	Old Tax Regime	New Tax Regime
Self-Occupied Property (SOP) Loan Interest	Up to ₹2,00,000 (combined for two SOPs)	NOT ALLOWED
Let-Out/Deemed Let-Out Property (LOP/DLOP) Loan Interest	Full interest amount (no limit)	Full interest amount (no limit)
Set-off of House Property Loss	Up to ₹2,00,000 against other income. Balance carried forward for 8 years.	No set-off against other income. Only carried forward against future House Property income.

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4. Illustrative Example: Two Houses (One Self-Occupied, One Let-Out)

Let's assume you have:

• House 1: Self-occupied, with a home loan where you paid ₹1,80,000 interest in FY 2024-25.

• House 2: Let out, earning ₹30,000 per month rent (₹3,60,000 annually). You paid ₹20,000 Municipal Taxes and ₹2,50,000 interest on its home loan in FY 2024-25.

• Your Salary Income: ₹15,00,000.

Calculation under Old Tax Regime:

• House 1 (SOP):

• GAV: Nil

• Less: Interest u/s 24(b): ₹1,80,000 (within ₹2 lakh limit)

• Income/Loss from House Property 1: Loss of ₹1,80,000

• House 2 (LOP):

• GAV: ₹3,60,000

• Less: Municipal Taxes: ₹20,000

• NAV: ₹3,40,000

• Less: Standard Deduction (30% of NAV): ₹1,02,000

• Less: Interest u/s 24(b): ₹2,50,000 (full interest allowed as it's LOP)

• Income/Loss from House Property 2: ₹3,40,000 - ₹1,02,000 - ₹2,50,000 = Loss of ₹12,000

• Total Income/Loss from House Property: Loss of ₹1,80,000 + Loss of ₹12,000 = Total Loss of ₹1,92,000

• Set-off against other income: This entire loss of ₹1,92,000 can be set off against your Salary Income (as it's within the ₹2 lakh limit).

• Taxable Salary Income: ₹15,00,000

• Less: Loss from House Property: ₹1,92,000

• Adjusted Taxable Income: ₹13,08,000 (before other Chapter VI-A deductions like 80C, 80D, etc.)

Calculation under New Tax Regime:

• House 1 (SOP):

• GAV: Nil

• Interest u/s 24(b): No deduction allowed.

• Income/Loss from House Property 1: Nil

• House 2 (LOP):

• GAV: ₹3,60,000

• Less: Municipal Taxes: ₹20,000

• NAV: ₹3,40,000

• Less: Standard Deduction (30% of NAV): ₹1,02,000

• Less: Interest u/s 24(b): ₹2,50,000 (full interest allowed for LOP)

• Income/Loss from House Property 2: ₹3,40,000 - ₹1,02,000 - ₹2,50,000 = Loss of ₹12,000

• Total Income/Loss from House Property: Total Loss of ₹12,000

• Set-off against other income: This loss of ₹12,000 cannot be set off against your Salary Income. It can only be carried forward to be set off against "Income from House Property" in future years.

• Taxable Salary Income: ₹15,00,000

• Adjusted Taxable Income: ₹15,00,000 (no other common deductions like 80C, 80D allowed either).

As you can see, the choice of tax regime significantly impacts your final tax liability, especially with home loans.

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5. ITR Forms for House Property Income

The specific ITR form you need to file depends on your overall income sources.

• ITR-1 (Sahaj): Generally for salaried individuals with simple income (salary, one house property SOP, other sources like interest). You cannot use ITR-1 if you have rental income from more than one house, or if you have a deemed let-out property.

• ITR-2: If you have income from "House Property" from more than one house (even if all are SOPs under the new rule), or if you have a let-out property (LOP) or deemed let-out property (DLOP), or if you have capital gains, you'll likely need to file ITR-2.

• ITR-3: If you have income from business or profession, in addition to house property income, you'll need to file ITR-3.

Action: When filling your ITR online, the system will guide you based on your selected income types. Be sure to accurately input details for each property in the "Income from House Property" schedule.

6. Key Considerations and Best Practices

• Choose Your Regime Wisely: For AY 2025-26, you still have the option to choose between the Old and New Tax Regimes. If you have substantial home loan interest on a self-occupied property or plan to aggressively set off house property losses against other income, the Old Tax Regime might still be more beneficial. If you have minimal deductions or want simpler compliance, the New Tax Regime could be suitable. Do a proper comparison calculation.

• Keep Records: Maintain meticulous records of:

• Rental agreements for LOPs.

• Municipal tax receipts.

• Home loan interest certificates (from your bank/financial institution).

• Proof of any other relevant expenses.

• Joint Ownership: If you co-own a property, each co-owner declares their proportionate share of the rental income and can claim their share of home loan interest deduction (subject to limits). This can be a smart tax-saving strategy.

• Vacant Properties: The Budget 2025 change (allowing two SOPs) simplifies things. If you have only two properties and they are both vacant, you can declare them as SOPs and avoid notional rent. If you have three or more, and one is vacant and not SOP, it will be a DLOP.

• Pre-Construction Interest:1 Interest paid on a home loan during the construction period can be claimed in five equal installments starting from the year the construction is completed. This applies to both SOPs (up to ₹2 lakh limit) and LOPs/DLOPs (full interest).

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7. Quick Checklist for Filing ITR with Multiple Properties

Aspect	Action Required
Property Classification	Decide which two properties (if you have more than two) you want to declare as Self-Occupied (SOP) for AY 2025-26. The rest become Let-Out (LOP) or Deemed Let-Out (DLOP).
Gross Annual Value (GAV)	For LOPs/DLOPs, calculate the correct GAV (actual rent or notional rent based on market value).
Municipal Taxes	Collect receipts for municipal taxes paid for all properties. Deduct from GAV.
Standard Deduction (30%)	Apply this for LOPs/DLOPs. It's a direct deduction from Net Annual Value.
Home Loan Interest	Obtain interest certificates from your lender(s). <br> Old Regime: Claim up to ₹2 lakhs for SOPs (combined). Claim full interest for LOPs/DLOPs. <br> New Regime: No deduction for SOPs. Claim full interest for LOPs/DLOPs, but losses cannot be set off against other income.
ITR Form Selection	If you have multiple houses (even if only 2 SOPs), or LOP/DLOP, you will likely need ITR-2. If you have business income, then ITR-3.
Regime Comparison	Carefully compare your tax liability under both Old and New Regimes before finalising, especially if you have significant home loan interest and other deductions.
Loss Carry Forward/Set-off	Understand how house property losses are treated in your chosen regime (set off against other income or carried forward only against future house property income).
Documentation	Keep all rent agreements, municipal tax receipts, and home loan interest certificates handy for at least 6-8 years.

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Conclusion: Plan Your Property Portfolio, Plan Your Taxes!

Owning multiple properties can be a rewarding experience, but the tax implications require careful planning. With the latest changes allowing two self-occupied properties and the ongoing option of the New Tax Regime, it's more important than ever to understand how your rental income and home loan interest will be treated.

Don't let tax complexities deter your investment goals! By accurately declaring your house property income and claiming all eligible deductions, you can optimize your tax liability and ensure compliance. If you're managing a complex property portfolio or are unsure about regime selection, it's always wise to consult a qualified tax advisor.

Share this guide with anyone managing multiple properties – help them keep their tax affairs in order!

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 Meta Title: Two Houses, Two Tax Regimes: Rental Income & Loan Interest in ITR for AY 2025-26

Meta Description: Understand tax implications for rental income from two houses and home loan interest on self-occupied property, especially under the new tax regime, for AY 2025-26. A detailed guide for Indian taxpayers.